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It may seem like another bright spot in the housing market: New foreclosure proceedings fell by nearly 22 percent in October, according to Lender Processing Services. In fact, the drop is likely temporary, driven by a change in regulations that took effect in September.
The federal government's National Mortgage Settlement with the country's five largest mortgage servicers requires servicers to provide written notice to homeowners 14 days before referring a delinquent loan to a foreclosure attorney. This has resulted in a "temporary slowdown in foreclosure starts that we do not believe is indicative of a longer-term trend," said Herb Blecher, a senior vice president of Lender Processing Services, in a statement.
Foreclosure starts also declined by nearly 48 percent on a year-over-year basis, leading to a nearly 7 percent drop in overall foreclosure inventory. Part of this may be due to rising home prices, which is increasing homeowners' equity, allowing many to refinance to a lower mortgage rate.
Another reason could be the increase in mortgage modifications this past fall -- also part of the National Mortgage Settlement. At the end of the year, the Mortgage Forgiveness Debt Relief Act of 2007 expires. The act allows homeowners who received a reduction in principal to avoid paying tax on the amount of the debt that was forgiven. On Jan. 1, unless Congress extends it, homeowners will owe taxes on debt relief.
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